Which assets are covered under impairment?

It is important to note that Impairment of Assets as per Ind-AS 36 covers all the types of assets except the following:

• Inventories (Covered by Ind-AS 2)
• Contract assets and assets that arise from costs to fulfil or obtain a contract (Ind AS 115)
• Deferred Tax Asset (Ind AS 12)
• Assets that arise from employee benefits (Ind AS 19)
• Biological assets that are measured at fair value less cost to sell (Ind AS 41)
• Deferred acquisition costs and intangible assets arising from the insurance contracts (Ind AS 104)
• Non-current assets (or disposal groups) that are classified as held for sale (Ind AS 105)
• Financial Assets (Ind AS 109)

Thus, Ind-AS 36 applies to the following financial assets:

• Subsidiaries (Ind AS 110)
• Associates (Ind AS 28)
• Joint Ventures (Ind AS 111)

Timing for impairment testing?

Impairment testing helps determine whether an asset or CGU indicates its actual value and whether it is impaired or not. However, it is important to determine when an entity should test for impairment. As per Ind-AS 36 and IFRS, an entity should test for impairment when there is an indication of impairment of an asset or CGU. However, for the following assets, impairment testing should be done annually irrespective of whether there is an indication of impairment or not:

• Intangible assets having an indefinite useful life
• An intangible asset that is not yet available to use
• Goodwill acquired through the business combination

Indicators of impairment of assets

Thus, whenever an asset’s actual value gets lower than its current recorded value, impairment becomes important. Ind-AS 36 prescribes a certain set of indicators, both external, internal and others, that allows us to determine whether an asset needs impairment or not. The following are the indicators of impairment of assets:

1)  External indicators of impairment

• The carrying amount of an entity’s net assets is lower than its market capitalisation.
• A change in the interest rate or market rate of return on investment indicates impairment.
• Significant adverse change in the market, technology legal or economic environment in which the entity operates.
• The market value of the asset declined significantly more than the expected value as a result of normal use or the passage of time.

2)  Internal indicators of impairment

• Evidence is available suggesting physical damage or obsolescence of the asset.
• Evidence indicates that the economic performance of the asset is declining or is worse than expected.
• Significant change having an adverse effect on the entity relating to the manner or extent in which the asset is used or expected to be used in the future.

3)  Other indicators of impairment

Valuation of investments are important for depicting the true financial standing of an entity. In the case of investments in subsidiary, associate or jointly controlled entities, the investor recognises the dividend from the investment and evidence is available that:

• The carrying amount of the investments in the separate financial statements exceeds the carrying amount in the consolidated financial statements (CFS) of the investee’s net assets, including the associated goodwill or
• The dividend exceeds the total comprehensive income of the subsidiary, associate or jointly controlled entity in the period the dividend is declared.

It should be remembered that the above list is not exhaustive.

How to calculate impairment loss?

For determining the impairment loss for valuation, an entity should follow the below steps:

1. Determine the carrying amount of the asset.
2. Measure the recoverable amount of the asset. As stated earlier, the recoverable amount of the asset or CGU is the higher of fair value less cost of disposal or the value in use.
3. If the carrying amount of the asset is more than the recoverable amount, then the difference should be treated as an impairment loss.

Thus, the formula for impairment of asset is as follows:

Carrying amount > Recoverable Amount = Impairment Loss

The impairment loss so calculated should be adjusted in the following order:

• Firstly, it shall be used to reduce the carrying amount of goodwill allocated to that particular cash-generating unit
• Then, it should be adjusted against other assets of the unit on a pro-rata basis of the carrying amount of each asset.

Practical example on impairment for valuation

4 companies i.e., A Ltd., B Ltd., C Ltd. and D Ltd. each have their own CGUs. Considering the implications of Ind-AS 36, they decided to carry out impairment testing.  They determined the carrying amount, value in use and fair value less cost of disposal for their respective CGUs. Applying Ind-AS 36, following is how impairment loss should be determined for valuation purposes:

Reversal of impairment loss

At the end of each reporting period, the entity shall assess whether there is any indication that the impairment loss recognised previously has reduced or no longer exists. If the answer is affirmative, then the entity shall reassess the recoverable value of the asset and the impairment loss should be reversed. Reversal of impairment loss indicates an increase in the service potential of the CGU or asset.

The amount of impairment loss, to the extent reduced, should be reversed except for the amount adjusted against goodwill. However, it should be noted that if the recoverable value exceeds the carrying amount just because of the passage of time and the increase in the present value of future cash flows as they come closer, then the reversal should not be done.

Wrapping up

Impairment of assets is important to depict the true value of an organisation’s net worth. Ind-AS 36 and IAS 36 (IFRS) lays down detailed provisions and regulations governing the impairment. Further, it helps organisations make informed decisions relating to their assets and CGUs at large. Getting the assets valued periodically and testing the indicators of impairment not only ensure statutory compliance but also helps organisations stay updated with their financial standing and health.

For any queries or assistance relating to the valuation and impairment of assets, reach out to N Pahilwani & Associates.